U.S. markets drop back within technical muck

Focus: Integrated Oil, APC, HES, ATVI, GIL, DO, DE, RMBS, RAD

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CINCINNATI (MarketWatch) -- After the Federal Reserve's policy actions last week, the U.S. markets have dropped back within the technical muck.

Perhaps most notably, each index has violated the October lows, suggesting further consolidation is in order before the U.S. markets reach firmer technical ground.

The S&P 500's hourly chart above serves as a detailed view of the past three weeks.

After breaking under the October low on the Fed's interest-rate cut, the S&P subsequently observed that level as resistance.

Upon failing to clear that area, it sold off on Monday, notching two-week lows.

From current levels, first resistance holds around 1,460, followed by more important overhead around the 1,490 October low.

Meanwhile, the Dow Jones Industrial Average also pulled in last week on the Fed's rate cut.

With those losses, it has broken back under the October low, dropping to the middle of its three-week range.

From current levels, first resistance holds around 13,250 followed by the 13,407 October low.

This next chart above is a daily view of the Nasdaq, illustrating the past six months.

Earlier this month, the index topped almost precisely at its 50-day moving average and the 2,724 July peak.

Since then, it's sold off sharply, breaking back under the 200-day moving average on Monday.

The failure to clear the July peak suggests further consolidation is needed before the Nasdaq gets back on its feet.

Meanwhile, the Dow's wider backdrop remains essentially trendless.

Yet as the chart illustrates, the blue-chip benchmark edged under its 200-day moving average with Monday's 172-point loss.

From Monday's close of 13,167, the Dow's 200-day holds at 13,300 and is followed by resistance at the 13,407 October low.

And while the S&P 500's backdrop looks much like the Dow's, the S&P is slightly weaker.

That's because, over the past two sessions, the S&P has placed distance under two key technical levels: The October low of 1,490, and the 200-day moving average, currently 1,487.

Looking ahead, the S&P needs a sustained break atop that area to place its technical backdrop on firmer footing.

Conversely, its primary trend would turn lower on a violation of the 1,406 November trough, leading to potentially significant further downside.

The bigger picture

With just eight trading days remaining in 2007, the U.S. markets have notched modest yearly gains.

Specifically:

-- The Dow Jones Industrial Average has rallied 704 points, or 5.6%

-- S&P 500 has added 28 points, or 1.9%.

-- The Nasdaq has gained 159 points, or 6.6%.

Still, the flattish performance above hasn't come in a straight line.

In fact, just considering the past five months, the S&P 500 has staged two significant corrections: A 12% pullback from the July high, followed by an 11% drop from the October peak.

Making things more challenging, the S&P briefly notched all-time highs between those two pullbacks.

Against this volatile backdrop, the current technical outlook remains right where it's been across the past several months -- murky, at best.

Starting with the negatives, each index has broken back under its October low following the Fed's policy actions last week.

Specifically, at Monday's close:

-- The Dow industrials stood 240 points under the 13,407 October low.

-- The Nasdaq held 124 points under its 2,698 October low.

-- The S&P 500 was positioned 44 points under its 1,490 October low.

So until those October lows are cleared, the near-term outlook will favor further consolidation.

Yet on the positive side, the major benchmarks remain atop significant support defining the U.S. markets' longer-term uptrend.

The specific areas fall out as follows:

-- Dow support at the November closing low of 12,743.

-- Nasdaq support at the November low of 2,540.

-- S&P support at the November low of 1,406.

Looking ahead, a close under these levels would mark a significant "lower low" placing the U.S. markets within a longer-term downtrend.

So for the time being, it's as "simple" as that.

With last week's failure to reclaim the October lows, the U.S. markets' near-term outlook favors further consolidation. Yet barring a close under the November lows, the primary uptrend remains tenuously intact.

Tuesday's watch list

The charts below highlight names well positioned technically. These are intended as radar-screen names -- sectors or stocks positioned to move in the near term. For the original comments on the stocks below, check out The Technical Indicator Library.

Index

Symbol

Mon Close

Support

Resistance

Integrated Oil Index

XOI

1,463

1,450

1,522

As the chart above illustrates, the Integrated Oil Index is among the better-positioned sectors.

After a steep rally from the August low, the November pullback was shallow by comparison.

And with that shallow pullback, the chart above may be forming a bullish cup-and-handle formation. The "cup" is defined by the July and October highs, while the "handle" is in progress, but would be defined by the October and December peaks.

If the pattern materializes with a break to new highs, a price target can be assigned by taking the depth of the handle -- in this case, about 170 points -- and adding that value to the breakout point, around 1,520.

The result is an intermediate-term target of about 1,690, or roughly 15% above current levels.

Earlier this month, it gapped higher after announcing it will merge with Vivendi's Blizzard Entertainment Inc. to create an $18.9 billion company called Activision Blizzard. (The company will remain publicly traded under the "ATVI" symbol.)

Earlier this month, it spiked atop a five-month downtrend that had closely tracked its 50-day moving average.

Since then, it's pulled in on lighter volume to a better entry near the former trendline.

At current levels, it holds 17.1% under the December high, and fully 67% under the June peak.

Editor's Note: This is a free edition of The Technical Indicator, a daily MarketWatch subscriber newsletter. To sign up this column, including at least six technical stock picks, every day, click here.

Still well positioned

The table below includes names recently profiled in The Technical Indicator that remain well positioned. For the original comments on the stocks below, see The Technical Indicator Library.

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